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2024 Q2 Market Commentary: Top Ten

Following a strong first quarter, the second quarter of 2024 was more of a mixed bag in the investment markets. The S&P 500 continued to lead the way with a 4% return, leaving it up over 15% for the year. However, US Small-Cap stocks dropped 3%, and REITs fell by about 1%. Outside of the US, developed market stocks were down less than 1%, while emerging market stocks were up almost 5%. 

The bond market was relatively quiet in the second quarter, with the Bloomberg US Aggregate index up about 0.1%. Treasury yields rose for the quarter, but only by about 0.19%. The Federal Reserve declined to cut rates, but economic data continues to show support for potential rate cuts this year.

As can be seen in this graphic, the gains in the S&P 500 so far this year have mostly been driven by the top ten holdings. While the top ten holdings make up about 33% of the market cap weighting, they contributed 74% of the total returns so far this year. Nvidia, the chip maker powering the AI revolution, contributed about 5% by itself to the total return of the index. 

Due to the incredible returns from these large technology companies, the technology sector has vastly outperformed other areas of the market. As you can see in the next graphic, we haven’t seen the S&P 500 technology sector reach levels like this compared to the S&P 500 since March 2000. That was at the peak of the internet bubble, and we know what happened next.  History never repeats itself, so we don’t know what will happen this time, but history does show the power of diversification.

When one area of the market outperforms the way technology has recently, it can be difficult to stick with a diversified portfolio. It is very tempting to “put all your eggs in one basket” and overweight your portfolio to the current hot stocks like Nvidia and the rest of the technology sector. That type of portfolio “might” lead to higher returns, but it will also lead to much higher volatility. Even the best-performing technology stocks have had massive drawdowns on their way to those higher returns. Amazon was down as much as 94% after the internet bubble crashed and Microsoft was down 75% from 2000 to 2009. Holding a diversified portfolio means never earning the highest return, but it also means avoiding the worst drawdowns. 

Looking ahead to the rest of the year, all eyes are on the November election. The recent debate has tilted the odds in former President Trump’s favor, but there is a lot of time between now and election day. Everyone wants to try to predict what will happen and how that will impact the markets, but the truth is that nobody knows. Markets have gone up and down throughout history under both Democrats and Republicans. 

The one thing we do know is that our perception of the economy will change depending on our political affiliation and who wins in November. This chart from JP Morgan shows how different Democrats’ and Republicans’ views of the economy have been over the past 24 years. When your preferred party is in office, you are much more likely to view the economy as performing well, no matter what the underlying data shows. As you can see, the economy grew at around 2-3% under each of the last 4 presidents, yet consumer confidence varied widely under each.

The key takeaway is that you should not let politics drive your investing behavior. Regardless of how you feel about either of the presidential candidates, they will not be the sole determinant of what happens in the complex investment markets. There is no way to predict the impact on the markets, so the best approach is to remain diversified among different asset classes and ensure your asset allocation is aligned with your risk tolerance and return requirements. 

While we can’t predict how the election outcome will impact the markets, we do know how it will likely impact tax policy. The tax cuts from the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025. These were put in place under President Trump, and if he is re-elected, he will likely try to extend those cuts. If Biden is re-elected, he will likely let them expire. There are both income tax and estate tax impacts here, so you should be thinking about this now, especially if you could have a taxable estate if the cuts expire. Remember, the current estate tax exemption is $13.61 million per person, which could fall to around $7 million in 2026.

-Chris Benson, CPA, PFS

The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures more information.